Microsoft (MSFT 1.22%) investors had a great 2023. Shares of the software giant soared nearly 60% compared to the 24% increase in the S&P 500 and the 43% rally in the Nasdaq Composite. That's a fantastic return for a stock that had already been valued at nearly $2 trillion at the start of the year.
Microsoft's market capitalization is now approaching $3 trillion, which will necessarily limit the growth that investors will see from the stock going forward. Yet Wall Street is right to be optimistic about the company's opportunities to expand its sales footprint with the help of artificial intelligence (AI) and growing demand in the cloud services industry.
Let's look at why you might want to keep this rallying stock on your watch list for 2024.
1. Many growth avenues
Several of Microsoft's major sales segments were under pressure in 2023, yet its overall growth was still solid. That's because the tech giant is highly diversified even compared to huge peers like Apple, which reported modestly declining sales in 2023.
Microsoft's booming software services segment, for example, offset weakness in niches like video game and PC software. Demand was healthy in the cybersecurity niche and for its Azure platform, helping revenue rise 12% in the most recent quarter.
The budding AI era is already having a positive impact on Microsoft's portfolio. In late October, executives said that the tech titan is boosting demand and making most of its products more valuable for users. It's no wonder, then, that Microsoft is rapidly rolling out AI upgrades throughout its portfolio.
"We are making the age of AI real for people and businesses everywhere," CEO Satya Nadella said in a statement.
Microsoft will need continued success here for the stock's rally to extend into 2024 and beyond.
2. Cash and profits
You'll have a hard time finding a more financially impressive business. Unlike smaller software-as-a-service stocks, Microsoft is already highly profitable. Operating profit was $27 billion last quarter, or 48% of sales. Contrast that level with Apple and its 30% profitability and you can see why investors have been so happy with Microsoft's performance lately.
The trends have also been stellar around its finances. Microsoft added more than $5 billion to its operating profit in the most recent quarter as it boosted both gross and operating profit margin.
Operating cash flow expanded to over $30 billion at the same time from $23 billion a year earlier. Shareholders were thrilled to see cash balances rise to $80 billion in fiscal Q1.
That boost came despite aggressive spending on direct cash returns. Microsoft sent more than $9 billion to investors through dividends and stock buybacks in just the quarter ending in late September.
3. The right price
That means the biggest risk for investors is paying too high a price for this successful business. Microsoft shares are valued at about 13 times annual sales at this writing, up from a price-to-sales ratio of around 9 in early 2023. That valuation boost was partly driven by Wall Street's rising expectations around economic growth rates and the shrinking likelihood of a major recession hitting the software market. It's also been powered by Microsoft's accelerating sales gains and improving profit and cash flow trends.
Investors could see solid returns from owning this growth stock if these trends continue. The returns will come from a mix of capital appreciation and rising dividend and stock repurchase spending.
However, if you're risk averse, you might want to simply watch Microsoft shares over the next few quarters for a chance to buy in at a lower price. Either way, the tech giant is highly likely to be setting more sales and profit records in the years to come.
